by Charles Brewer, President, Actionable Intelligence
It is mid-October and that means earnings season is about to begin. Over the next few weeks, the OEMs will let their investors know how their businesses have done during the past quarter. Reporting on October 22, Lexmark will the first printer hardware OEM to host an earnings call for the investment community, followed by Canon and Xerox on October 24. All three firms will be reporting their respective third-quarter earnings. As we move through the remainder of October, Japanese OEMs, most of which follow an April 1 to March 31 fiscal year, will disclose their second-quarter results. Finally, next month, Hewlett-Packard, which has a unique fiscal year that runs from November 1 through October 31, will tell investors about its fourth-quarter performance along with its results for the entire fiscal year.
I expect OEMs will have relatively good news for their investors. Most will say they are having one of the strongest years they have experienced since the economy went south in 2009. I say that because much of what has been reported so far this year has been positive and, from what we heard this summer in terms of market demand, I expect to continue to hear more good news as year winds down. That is not to say, however, that I’m expecting explosive growth or even truly robust performance from most hardware makers. I think we all understand that the “new normal” defines modest single-digit growth as “good news.” Heck, even declines that appear to be moderating rather than plunging off a cliff can qualify as “good news” in today’s mature market.
There are various reasons why the OEMs are having a good year. The weakening yen has given Japanese manufacturers a much-needed shot in the arm. Most, if not all, OEMs in Japan have enjoyed some degree of top-line growth over the past couple of quarters. This has also been good news for U.S.-based OEMs because they all get some technology from their Japanese partners. Beyond the depreciating yen, several hardware manufacturers including OKI, Ricoh, and Xerox are seeing some improvement in their fiscal performance as the positive impact of earlier payroll reductions and other cuts begin to be felt. Konica Minolta, which has quietly trimmed its printer-related payroll, said in July that the group that markets its printers and copiers along with other business technologies saw a remarkable 95 percent gain in its operating income after adjusting for the depreciating yen.
Another factor that is contributing to the OEMs’ improved financials is the ongoing shift towards higher-end machines, especially more color devices, in various market segments. The most robust growth is coming from the production space. Even monochrome “big iron” machines and light production devices are enjoying stronger demand as a growing number of publishers look to print books on-demand. At last month’s PRINT 13 show, it was clear that commercial printers in North America are investing in digital technologies, which is great news for the industry as a whole. Hardware vendors in the production space are doing all they can to fully leverage the possibilities the production space offers. Ultimately, this should spark growth in other segments as vendors reposition various office devices as cost-effective solutions for commercial printers. OEMs including Konica Minolta, OKI, and Ricoh appear to be embracing new go-to-market strategies that should allow them to drive sales for even more hardware by further penetrating the print-for-pay industry with lower-end machines that can support and augment the increased number of big iron devices that are now shipping.
Demand for more production equipment in North America is one more sign that the U.S. economy is improving. Slowly but surely, the number of unemployed workers is trending downward. Recent data from the ManpowerGroup, a staffing agency that hires personnel around the world, recently indicated that staffing levels across the United States will improve through the end of the year. The firm said, “The hiring outlook in the U.S. now stands at its strongest level since 2Q 2008 after steadily improving for four years, although still significantly below its previous peak in 2006.” The ManpowerGroup is also forecasting healthy job growth in certain parts of Europe, including the UK and Germany, and in Brazil and Japan. The company said the Indian job market will experience the strongest growth after several quarters of decline.
Most OEMs appear to be cashing in on the improved economic climate, particularly in the United States. The North American market has been a bright spot in many of the quarterly reports that I’ve read this year, and I expect the same will be true during the upcoming earnings season. Brother reported in July that sales of its printers and communications gear were up nearly 10 percent in the Americas during its first quarter, which ended on June 30, and this growth came after adjusting for the improved foreign exchange rate. Epson said it managed to grow its installed base of inkjet units in North Americas this year along with consumables sales thanks in part to improved sales of business-class devices. While worldwide unit shipments were down, Epson managed to grow net sales during the first quarter die in part to rising average selling prices as well as the depreciating yen.
Following the inkjet market’s collapse, OEMs such as Epson have indicated they are now seeing new signs of life in the inkjet space. In August, HP reported that unit shipments of its consumer products, which are largely inkjets machines, were up for the first time in two years. While perhaps not “great,” Canon had some not-so-bad news about its inkjet business, too. The firm said net sales of inkjet machines were up 17.3 percent, which was essentially flat after adjusting for the exchange rate. Remembering that for many flat is the new growth, flat inkjet sales ain’t bad. Even better, Canon said it increased sales of its inkjet consumables during the second quarter, although it did not provide specifics.
Most firms reported this year that demand for color MFPs increased along with demand for color printers. In its second quarter, which ended in June, Xerox reported that unit shipments of its entry-level A4 color MFPs were up a whopping 50 percent compared to a year earlier. Unit shipments of Canon color copiers grew 12 percent year-over-year, and its color printer shipments grew 17 percent. Ricoh also reported that sales of its color MFPs are up this year compared to last. Stronger demand for color hardware appears to be allowing Ricoh to move beyond some of the problems that caused it to record its first annual net loss last year since being listed on the Tokyo Stock Exchange. The firm raised its revenue target in July for the current year presumably because of the weaker yen.
All things considered, there are plenty of reasons for being optimistic about the market right now. But, I should caution you to avoid any irrational exuberance. The industry as a whole appears to be turning a corner, but that’s not true for all firms, nor is it true for all market segments. Lexmark seems to be ailing despite its ongoing successes in the courtroom against U.S.-based third-party supplies vendors. The firm managed to beat analysts’ expectations during the second quarter but that was because of the financial boost it received from the sale of its inkjet business. Overall hardware and consumables sales were down at Lexmark. The firm expects revenues to be off around 5 percent this year. And Lexmark is not the industry’s only firm experiencing a downturn. OKI is in dire straights as is Sharp. And Epson has far to go before it is out of the woods. Even Canon, which used to be seen as one of the most solid firms in the industry, revised its outlook for the year downward in July.
A good amount of uncertainty remains in world’s economy too. While India is doing better, various countries in the European Union are struggling, especially those along the Mediterranean. The short-term strength of the Chinese economy is less than robust. Larger problems in either of these regions could be extremely detrimental to our industry. Speaking of economics, the deterioration of the yen, which has been so beneficial for the Japanese companies, is the result of steps being taken by the Japanese government. Should it decide to change course, or if the yen starts to appreciate for some other reason, the gain Japanese OEMs have made are likely to vanish. This will impact U.S. companies like HP, Lexmark, and Xerox, which all depend to some degree on Japanese partners for their print-engine technology.
I suggest that you stay tuned for all the latest news as the OEMs begin to report next week. Happy Earnings Season!
